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Ch 3 · Partnership · T.S. Grewal — Double Entry Book Keeping

Change in
Profit-Sharing Ratio

75 MCQs 50 Flashcards T.S. Grewal Class 12 Updated May 2026
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Chapter Overview

Chapter 3 covers the first form of reconstitution of a partnership firm — a change in the profit-sharing ratio (PSR) among the EXISTING partners. The same set of partners continues to carry on the business, but agrees that future profits will be shared in a different ratio. No partner enters; no partner leaves. The firm is reconstituted, not dissolved.

The chapter rests on two new tools: the Sacrificing Ratio (Old − New) which identifies the partners who give up a share of future profits, and the Gaining Ratio (New − Old) which identifies the partners who pick up extra share. The total amount sacrificed equals the total amount gained, so the sum of all partners' shares stays at 1.

Procedurally, four adjustments are made as on the date of change: (1) Revaluation A/c records changes in the values of assets and liabilities — gains on the credit side, losses on the debit side, transferred to old partners in OLD ratio; (2) accumulated profits, losses and reserves (General Reserve, P&L A/c, Workmen Compensation Reserve excess, Investment Fluctuation Fund excess, Deferred Revenue Expenditure) are distributed in OLD ratio; (3) goodwill is adjusted between sacrificing and gaining partners through their Capital A/cs — never raised in the books, because Accounting Standard 26 prohibits recognition of self-generated goodwill; and (4) capitals are adjusted to the new PSR proportion if so agreed. These adjustments form the heart of the 6-mark and 8-mark questions on the board paper.

What You'll Learn
Key Concepts
Trigger
Reasons for Change
More time devoted by one partner; additional capital introduced; special skill becomes important; mutual agreement to revise shares. Existing partners continue.
Ratio 1
Sacrificing Ratio
Sacrificing Ratio = OLD Ratio − NEW Ratio. Positive value identifies the partner whose share has fallen — he is credited for goodwill.
Ratio 2
Gaining Ratio
Gaining Ratio = NEW Ratio − OLD Ratio. Positive value identifies the partner whose share has risen — he is debited for goodwill.
AS 26
Goodwill Adjustment Entry
Dr Gaining Partner's Capital A/c / Cr Sacrificing Partner's Capital A/c with Goodwill × (sacrifice or gain). Goodwill A/c is NOT raised in books.
Account
Revaluation A/c
Dr losses (asset down, liability up). Cr gains (asset up, liability down). Net profit / loss transferred to old partners' Capital A/cs in OLD ratio.
Old Ratio
Accumulated Profits / Losses
General Reserve, P&L A/c (Cr or Dr), Deferred Revenue Expenditure — all distributed to old partners in OLD ratio (earned before change).
Reserve
Workmen Compensation Reserve
If claim < reserve → excess to OLD partners in OLD ratio. If claim > reserve → shortfall debited to Revaluation A/c (loss).
Reserve
Investment Fluctuation Fund
If MV ≥ BV → full IFF to OLD partners in OLD ratio. If MV < BV → fall absorbed by IFF first, then any shortfall to Revaluation A/c.
Optional
Capital Adjustment
After all adjustments, capitals may be brought into NEW PSR proportion. Required = Total adjusted capitals × New share. Surplus → withdraw; Shortfall → bring in.
Sample MCQs
Q1. On a change in profit-sharing ratio among existing partners, the firm is said to be:
A. Dissolved
B. Newly registered
C. Reconstituted
D. Liquidated
Any change in the relations between partners — change in PSR, admission, retirement, death — is a RECONSTITUTION of the firm. The partnership continues in a modified form; it is not dissolved, so no Realisation A/c is prepared.
Q2. P and Q share profits in the ratio 3:1. They decide to share equally. Goodwill of the firm is valued at ₹80,000. The goodwill adjustment entry through Capital A/cs is:
A. Dr Q's Capital ₹20,000 — Cr P's Capital ₹20,000
B. Dr P's Capital ₹20,000 — Cr Q's Capital ₹20,000
C. Dr Q's Capital ₹10,000 — Cr P's Capital ₹10,000
D. Dr Goodwill ₹80,000 — Cr P's & Q's Capitals ₹40,000 each
P's sacrifice = 3/4 − 1/2 = 1/4. Q's gain = 1/2 − 1/4 = 1/4. Goodwill adjustment amount = ₹80,000 × 1/4 = ₹20,000. The gainer (Q) is debited and the sacrificer (P) is credited. Per AS 26, Goodwill A/c is NOT raised in books — only Capital A/cs are adjusted.
Q3. A and B share profits 3:2 with capitals ₹6,00,000 and ₹4,00,000. On change in PSR to 1:1, Revaluation profit ₹50,000 ; General Reserve ₹30,000 ; Goodwill of firm ₹40,000 (no entry in books). The total amount CREDITED to A's Capital A/c on account of these adjustments is:
A. ₹62,000
B. ₹42,000
C. ₹52,000
D. ₹40,000
Revaluation profit ₹50,000 in OLD ratio 3:2 → A's share = ₹30,000. General Reserve ₹30,000 in OLD ratio 3:2 → A's share = ₹18,000. Goodwill: A's sacrifice = 3/5 − 1/2 = 1/10 → A credited ₹40,000 × 1/10 = ₹4,000. Total credit to A = ₹30,000 + ₹18,000 + ₹4,000 = ₹52,000.
Frequently Asked Questions
What does a 'change in profit-sharing ratio' mean?
It is a form of reconstitution of a partnership firm in which the SAME existing partners agree to share future profits in a different ratio. No new partner enters and none leaves — the firm continues with adjustment entries for revaluation, accumulated reserves, goodwill and (sometimes) capitals.
How are Sacrificing Ratio and Gaining Ratio calculated?
Sacrificing Ratio = OLD Ratio − NEW Ratio (a positive value means the partner has lost share). Gaining Ratio = NEW Ratio − OLD Ratio (a positive value means the partner has gained share). Both ratios are used in the same goodwill adjustment entry — sacrificers are credited and gainers are debited. If a partner's old share equals his new share, he neither sacrifices nor gains and his Capital A/c is not touched.
Why is goodwill adjusted via Capital A/cs and not raised in books?
Accounting Standard 26 (Intangible Assets) allows only PURCHASED goodwill to be recognised as an asset. Self-generated goodwill of a partnership firm cannot be raised on a reconstitution. Therefore the only permitted treatment is an adjustment entry through partners' Capital A/cs: Dr Gaining Partner's Capital A/c / Cr Sacrificing Partner's Capital A/c, with the amount equal to Goodwill × (sacrifice or gain).
How are accumulated profits and losses distributed on a change in PSR?
All accumulated balances at the date of change — General Reserve, P&L A/c (Cr or Dr), Workmen Compensation Reserve excess, Investment Fluctuation Fund excess, Deferred Revenue Expenditure — are transferred to old partners' Capital A/cs in the OLD ratio, because they pertain to the period BEFORE the change. Accumulated losses are debited; accumulated profits and free reserves are credited.
What is the Revaluation A/c used for?
The Revaluation A/c records changes in the values of assets and liabilities as on the date of change in PSR. Debit side: decreases in assets and increases in liabilities (losses), plus any unrecorded liability. Credit side: increases in assets and decreases in liabilities (gains), plus any unrecorded asset. The net profit or loss on revaluation is transferred to old partners in the OLD ratio — because the change in value pertains to the pre-change period.
How are Workmen Compensation Reserve and Investment Fluctuation Fund treated?
Workmen Compensation Reserve: if the claim is less than the reserve, the EXCESS is distributed to old partners in OLD ratio; if the claim exceeds the reserve, the SHORTFALL is debited to Revaluation A/c (a loss). Investment Fluctuation Fund: if Market Value ≥ Book Value, the entire fund is distributed in OLD ratio; if MV < BV, the fall is first absorbed by the IFF and any further shortfall is debited to Revaluation A/c.